L.A. BK Watch: “Common Quick Fix” Debt Mistakes

Our Chapter 7 bankruptcy attorneys have come across numerous clients who started off with a bad debt situation‚ and despite good intentions‚ ended up making it worse by attempting a quick fix.

Given the nosedive the economy has taken in recent years‚ there are a number of business models that have expanded specifically to prey upon those who are financially struggling. Some have existed for quite some time‚ but many have increased their marketing and recruitment efforts‚ and their pitches can sound appealing to someone who is being incessantly harassed by creditors.

Don’t fall for them. If you are in up to your eyeballs in debt‚ a bankruptcy lawyer is usually the best call you can make. If it’s at all possible to resolve the debts and help you avoid bankruptcy‚ we’ll help guide you through that process. But often‚ it makes more sense to file and obtain permanent and guaranteed relief.

That said‚ here are some of the “quick fixes” of which you should be wary:

Payday loans. They seem easy‚ convenient and you don’t have to have great credit to get one. All you need is a job or regular benefit payments. The problem is that these entities are notorious for price-gouging‚ despite state and federal legislation intended to curb these practices. On average‚ you’ll end up paying at least $15 for every $100 you borrow. So for an average‚ two-week loan‚ you’re looking at an annual interest rate of 400 percent. That’s bad enough‚ but a larger problem is that people are using them to cover every day‚ basic expenses that they can’t afford – and they’re doing so again and again. It becomes a vicious cycle of debt. Payday loans aren’t all bad‚ but they certainly won’t address the underlying problem. If you’re swimming in debt and can’t afford to make your car payment every month‚ it’s time for more drastic measures.

Buy-here-pay-here car lots. These dealerships take advantage of the fact that if you have poor credit and not a lot of cash on hand‚ you have few options in terms of getting a vehicle. They know you don’t have the credit to get a decent vehicle at a fair rate. So they jack up the prices on high-mileage cars and then charge you sky-high interest rates to borrow. Even then‚ you face possible repossession after only a single missed payment and they often force you to make that payment in person. A better option‚ if at all possible‚ is to try to scrape together a couple thousand dollars to purchase a car from a private seller. Even if you have to rely on public transportation for a while‚ it’s usually a better option than becoming indebted to one of these shady dealers.

Not paying taxes. Not filing your returns because you can’t pay won’t allow you to avoid detection – or payment. Penalties for failing to file are actually about 10 times higher than penalties for failing to pay. It’s important to note that owed taxes can’t be included in a bankruptcy‚ except under special circumstances. Internal Revenue Service can use harsh collection methods‚ including wage garnishments‚ levies on your bank accounts and filing a federal lien against your property. Not worth it.

Siphoning retirement funds. On the surface‚ it seems to make sense: I owe money‚ and I have money in this other place‚ why not simply use from one to pay off the other. In most cases‚ this is a bad idea because every $1‚000 you take out in your 20s will cost you an estimated $10‚000 or more in future losses. That’s even before you pay a steep penalty tax for taking the money out. The good news is‚ a Chapter 7 bankruptcy will keep your retirement funds protected‚ and allow you to unburden yourself from the debt.

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